Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 20, Problem 2P
a.
Summary Introduction
To calculate: The reduction in the total taxes of Western Exploration Corp. due to tax loss carry forward.
Introduction:
Tax loss carry forward:
It is a mechanism through which organizations can bring down their future income taxes by carrying forward prior losses to offset future profits.
b.
Summary Introduction
To calculate: The total income available for 3 years for the stockholders of Western Exploration Corp.
Introduction:
Stockholder:
A stockholder can be any organization or individual that/who has a substantial interest in the profitability of a business and holds shares in a corporation.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Paris Corporation holds a $100,000 unrealized net capital gain and a capital loss carryforward that will expire in the current year. Paris is subject to a 14 percent cost of capital. Its marginal tax rate is 25 percent. Should Paris accelerate the recognition of this gain from next year to this year, assuming a net capital loss carryforward in each of the following amounts?
$40,000
$10,000
Repeat the computation using the amounts in parts a and b, but this time assume that Paris is subject to a 6 percent cost of capital.
Hahn Textiles has a tax loss carryforward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000 per year for each of the next 7 years and a cost of capital of 14.7%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table
Webster Industries
Year
Earnings before taxes
1
$78,000
2
$118,000
3
$201,000
4
$298,000
5
$400,000
6
$398,000
7
$499,000
Both Reilly's and Webster's expected earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. Webster has a cost of capital of 14.7%. Both firms are subject to a 38% tax rate on ordinary income.
a. The maximum cash price Webster would be willing to pay for Hahn Textiles is ?
Hahn Textiles has a tax loss carryforward of $802,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,500 per year for each of the next 7 years and a cost of capital of 15.2%. Webster Industries has expected earnings before taxes for the next 7 years as shown in the following table,
Year
Earnings before taxes
1
$79,000
2
$122,000
3
$198,000
4
$302,000
5
$400,000
6
$400,000
7
$501,000
Both Reilly's and Webster's expected earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. Webster has a cost of capital of 15.2%. The corporate tax rate is 21%.
a. What is the tax advantage of the merger each year for Reilly?
b. What is the tax advantage of the merger each year…
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Tax effects of acquisition Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman has a tax loss carryforward of $1.8 million. Trapani can purchase Sussman for $2.1 million. It can sell the assets for $1.6 million, their book value. Trapani expects its earnings before taxes in the 5 years after the merger to be as shown in the following table. The expected earnings given are assumed to fall within the annual limit that is legally allowed for application of the tax loss carryforward resulting from the proposed merger (see footnote 2). Trapani is in the 21% tax bracket. Calculate the firm’s tax payments and earnings after taxes for each of the next 5 years without the merger. Calculate the firm’s tax payments and earnings after taxes for each of the next 5 years with the merger. What are the total benefits associated with the tax losses from the merger? (Ignore present value.) Discuss whether you would recommend the proposed merger. Support your decision with…arrow_forwardFirm Z, a corporation with a 21 percent tax rate, has $100,000 to invest in year 0 and two investment choices. Investment 1 will generate $12,000 taxable cash flow annually for years 1 through 5. In year 5, the firm can sell the investment for $100,000. Investment 2 will not generate any taxable income or cash flow in years 1 through 5, but in year 5, the firm can sell Investment 2 for $165,000. Assuming a 6 percent discount rate, which investment has the greater NPV? Would your answer change if Firm Z were a noncorporate taxpayer with a 35 percent tax rate and the gain on sale of Investment 2 were eligible for the 15 percent capital gains rate?arrow_forwardRoyal Service, a large company, has offered $100 million to purchase General Manufacturing company. Royal Service is open to numerous ways to structure the deal: a stock or an asset purchase, and they are willing to give cash or their own stock. For General Manufacturing, each of the two shareholders have a stock basis of $40 million; the adjusted basis of assets is $80 million; and there is a $50 million NOL carry-forward. Discuss the Federal tax and SALT tax consequences under all scenarios. Assume the stock of General Manufacturing is owned by 50% by an individual and 50% by a C corporation. Write an IOM providing detail numbers to Royal with your recommendationsarrow_forward
- Pina Colada Corp. has income from continuing operations of $413,000 for the year ended December 31, 2022. It also has the following items (before considering income taxes). 1. An unrealized loss of $64,600 on available-for-sale securities. 2. A gain of $26,400 on the discontinuance of a division (comprised of a $9,100 loss from operations and a $35,500 gain on disposal). Assume all items are subject to income taxes at a 20% tax rate.Prepare a partial income statement, beginning with income from continuing operations, and a statement of comprehensive income. PINA COLADA CORP.Partial Income Statement choose the accounting period select an income statement item $enter a dollar amount select an income statement item select an income statement item…arrow_forwardAt the beginning of year 1, ABC Company raises $80 million of equity and uses the proceeds to buy a fixed asset. Operating profits before depreciation (all received in cash) are expected to be $50 million in year 1, $55 million in year 2, and $60 million in year 3. The firm pays out all operating profits as dividends and pays no taxes. At the end of year 3, the company terminates and has no remaining value. If the firm’s shareholders expect to earn a 10 percent return, what is the value of the firm’s equity using Discounted Dividend Approach?arrow_forwardIn the listed company ABC, you are asked to assume that annual profits before interest and tax (EBIT) are risk-free, perpetual and without growth. Next year's profit is expected to be 5,000, while the risk-free interest rate is expected to remain at 5% per annum. Years in the foreseeable future. With regard to the valuation of the company, it is assumed that book depreciation represents the actual cost of maintaining the company's production capacity, that the working capital will not change and all profit after tax is paid as a dividend to the shareholders. The company's tax rate is 20%, while shareholders and bond investors do not pay tax. a) If the company is debt free, what is the value of the company's equity? b) If annual interest expenses amount to 4,000, what will be the respective value of debt and value of equity? c) Is the company value really affected by capital structure? Explain briefly based on your calculations above.arrow_forward
- Firm W, which has a 34 percent marginal tax rate, plans to operate a new business that should generate $48,000 annual cash flow and ordinary income for three years (years 0, 1, and 2). Alternatively, Firm W could form a new taxable entity (Entity N) to operate the business. Entity N would pay tax on the three-year income stream at a 24 percent rate. The nondeductible cost of forming Entity N would be $5,800. Firm W uses a 6 percent discount rate. Use Appendix A and Appendix B. Required: Complete the below tables to calculate NPV. Should it operate the new business directly or form Entity N to operate the businessarrow_forwardidentify the tax issue(s) posed by the facts presented.Determine the possible tax consequences of each issue that you identify. Myrtle Coast Corporation has a $35,000 operating loss during the currentyear. Not included in the loss is a $40,000 dividend it received from acorporation in which it owns a 15 percent interest.arrow_forwardAt the beginning of the year 1, Down Under Company raises $60 million of equity and uses the proceeds to buy a fixed asset. Operating profits before depreciation (all received in cash) and dividends for the company are expected to be $40 million in year 1, $50 million in year 2, and $60 million in year 3, ath which point the company terminates. The firms pays no taxes. Assuming stright line depreciation to zero (of 20 million per year) the firm's profits thus equal $20 in year 1, $30 million in year 2 and $40 milion in year 3. If the cost of equity is 6%, the value of the firms equity is: Use the Discounted Dividend Valuation Methodarrow_forward
- What is the value of the tax shield if the value of the firm is $4million, its value if unlettered would be $3.67 million, and the present value of bankruptcy and agency costs is $250,000.arrow_forwardFor which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Equity Debt Preferred stock Water and Power Company (WPC) can borrow funds at an interest rate of 7.30% for a period of five years. Its marginal federal-plus-state tax rate is 25%. WPC’s after-tax cost of debt is (7.30, 5.21, 6.03, 5.48) (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,136.50 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 9.17% 8.79% 7.64% 6.11%arrow_forwardMenendez Corporation expects to sell $ 12 million. Costs, excluding depreciationtion, will represent 75% of sales and a depreciation of $ 1.5 million is expected.Sales will be collected in cash and all costs less depreciation will bebe settled during the year. The federal and state tax rate is 40%.to. Prepare an income statement. What will the company's expected net cash flow be?b. Suppose that Congress modified the tax laws and that doubled thecompany pricing. There were no changes in operations. How would it affectThat in recorded earnings and net cash flow?c. Now suppose that Congress did not double depreciation but reduced it byfifty%. How will that affect net cash flow?d. If it were your company, would you prefer Congress to double depreciation spendingtion or cut it in half? Explain your answer.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning